'Contingency Planning
The final issue I will discuss today is contingency planning. Much has been said about the need to develop contingency
plans for the Year 2000 conversion, and I fully support these efforts. We need contingency plans in place for two main
reasons. First, to ensure that we have considered how to handle the inevitable disruptions that will occur as a result of
Year 2000, and second, to help build confidence that disruptions will not have systemic consequences. In the process
of contingency planning, we must also keep in mind that it is prudent to consider the possibility of some very serious, but
improbable, events.
Contingency planning for Year 2000 will not be limited to the century rollover itself. As my colleague, Roger Ferguson,
has described it, there will be a Year 2000 "shadow" that will affect financial markets both before and after the event
itself. This shadow will relate to the uncertainty among market participants about the possible consequences of Year
2000 disruptions for particular firms and markets. In some cases, this concern will lead market participants to consider
conventions and procedures for limiting risks during the rollover itself. For example, some transactions that normally
would be executed for settlement on January 3, 2000 may be postponed. In other cases, uncertainty about the possible
consequences of Year 2000 disruptions could lead to over-reactions on the part of market participants. As supervisors,
we will need to be increasingly alert to the possibility of Year 2000 rumors affecting the liquidity of firms during the latter
half of 1999, and should support the disclosure of accurate information in response.
The Basle Committee's Year 2000 Task Force will be developing a contingency planning document focused on issues
relevant for bank supervisors. I am pleased to see that the Joint Year 2000 Council also has formed a sub-group to
address contingency issues, including sound practices for financial institution contingency planning as well as
market-wide aspects. As I see it, there are three broad areas to consider in developing contingency plans. First, each
firm should have a contingency plan that covers business continuity issues in the case of operational problems affecting
its own systems. Institutions also should develop contingency plans that would help address Year 2000 problems arising
from their vendors or customers, or as a result of disruptions to public infrastructure. These plans should seek to assess
the risks that firms face in each instance and should focus on the possible measures that may be available to mitigate
those risks.
Second, supervisors and regulators need to develop their own contingency plans for how they will deal with problems
affecting them or the institutions under their jurisdiction. Most organizations have some experience in contingency
planning for various types of market disruptions, so this will not be entirely new ground. However, several aspects of
the Year 2000 problem are unique and will require fresh thinking. For example, the potential scope of operational
problems that may be experienced across different markets globally is new. At the time of the century change, there
also may be significant uncertainty about how long problems will last, as well as the extent to which some participants
are facing more than simply operational problems. On both of these fronts, I am hopeful that the transition to the euro at
the end of this year will give us some insight into how supervisors and regulators should cope with these issues.
The third major element of contingency planning that needs to take place is both cross-industry and cross-border in
scope. The Year 2000 problem has reminded us of the extent of interdependencies in our global economy. Financial
markets in particular are dependent on a mix of firms to provide liquidity in all of the various markets. These firms are
dependent on vendors for market information and communications, on payment and settlement systems to complete
transactions, and on power generators and other infrastructure providers to support all of their activities. In turn, these
infrastructure providers are dependent on receiving and paying for adequate supplies to keep their plants operating, as
well as on relevant insurance coverage to ensure that they can operate without unlimited liability.
We must consider the scope of these dependencies in formulating contingency plans. Needless to say, there is no way
that the financial sector can completely insulate itself from more widespread Year 2000 disruptions by developing
contingency plans. However, we should do what we can to prepare realistically for a wide variety of outcomes,
including some that may not be very likely. We also should open lines of communication with relevant associations and
regulatory bodies outside the financial sector in order to better understand their preparations and contingency plans, and
so that they could understand ours.
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